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Self-Directed CESA

Coverdell Education Savings Accounts

Self-directed Coverdell Education Savings Accounts allow individuals to invest funds for educational purposes.

Formerly known as an Education IRA, this trust or custodial account is created for the purpose of paying qualified education expenses of the designated beneficiary.

Contributions to a Coverdell ESA are not deductible, but all distributions are tax-free if they are used for qualified education expenses at an eligible institution.

Education savings accounts can be applied to qualified elementary, secondary, and higher education expenses.

Talk to an IRA Counselor about education savings accounts.

Self-Directed CESA Guide

Learn How to Pay for a Child’s Education Tax-Free


A CESA can be opened for a beneficiary who is under the age of 18 or for someone with special needs. For 2023/2024, the maximum contribution to a Coverdell ESA is $2,000 per year.

Unlike other savings plans that require earned income, you don’t need income to open a CESA.

However, if you do have earned income you must fall within certain modified adjusted gross income limits (MAGI). Your MAGI for the year that you open the account must be less than $95,000-$110,000 ($190,000-$220,000 for a joint return).

Self-directed CESA (Coverdell Education Savings Account) and tax treatment

2023/2024 CESA Contribution Limits

Coverdell Educational Savings Account (CESA) Contribution Limits
Standard Limit (Up to Age 18) Modified AGI Limits to Qualify for Account
$2,000 Single: $95,000 – $110,000
Married Filing Joint: 
$190,000 – $220,000
2023 CESA Contribution Deadline is 4/15/2024.
2024 CESA Contribution Deadline is 4/15/2025.

For more CESA information see IRA Publication 969.

What Makes a Coverdell ESA Self-Directed?

When a CESA account is referred to as a self-directed account, it simply means you can use the account invest in areas outside of the traditional stocks and bonds. That’s the primary difference between a self-directed and traditional retirement or other savings account — where you put those investment dollars.

With a self-directed CESA, IRA, or 401(k), you can invest in a variety of areas, including:

  • Real estate
  • Private debt like corporate debt offerings, notes secured by deeds of trust or mortgages
  • Private equity-like stock of C-corporations, limited partnerships, LLCs and REITs
  • Precious metals, including gold, silver, platinum, and palladium
  • Cryptocurrency like Bitcoin

Coverdell Education Savings Account FAQs


What is a Coverdell Education Savings Account (CESA)?

According to the IRS, a Coverdell ESA is a “trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account.” 1



How does a self-directed Coverdell ESA work?

Equity Trust offers a self-directed CESA, which allows you to invest in almost any asset, tax free or tax deferred, while savings for education costs. Investing funds contributed to a CESA may potentially lead to the overall growth of the account, in a tax-advantaged fashion.

Many of the clients at Equity Trust are primarily investing in alternative assets, beyond traditional stocks, bonds and mutual funds. Some of these alternatives include real estate, private lending, promissory notes, tax liens, cryptocurrency and many others.

A Self-Directed CESA Case Study

In 2017, Brian opened Coverdell Education Savings Accounts (CESAs) for each of his four children. He saw the savings potential: money saved in a CESA can be withdrawn tax-free when used for qualified education expenses.

An active real estate investor, Brian decided to try to grow his children’s accounts using self-directed CESAs.

A CESA’s annual contribution limit is $2,000. Brian was concerned that it would take a while to build up enough capital in the account to be able to invest in real estate. His purchasing power increased when he learned that he could partner with other self-directed accounts to make investments.

Brian thought it would be difficult to find a suitable investment property for less than $50,000 in the city of Nashville, but before long he found a vacant lot in the city for $8,000.

He partnered three of his children’s self-directed CESA accounts to purchase the lot. One child’s CESA invested $4,000, and his two other children’s CESAs each invested $2,000.

Brian saw potential in the lot because he spotted new housing construction nearby, as well as a mobile home park that was on the market.

“As I reviewed the potential of the area, I believed the value was going to change once they sold that mobile home park,” Brian recalls. “Once the mobile home park sold, additional houses were built continuing to push values up.”

The land was sold 60 days later for $60,000. The sale proceeds returned the CESA accounts in the same proportion as was used for the purchase.

Brian had been investing in real estate for a while before he was aware that he could self-direct his retirement account, CESA or other accounts into real estate and other alternative investments.


Are contributions to a Coverdell Education Savings Account tax deductible?

No – Contributions to a CESA are not tax deductible. Individuals contribute to a CESA with after-tax dollars, but those contributions can then grow tax-free through potential profits from the investments that you’re making. When money is withdrawn to pay for qualified education expenses, it’s tax-free


What are the CESA contribution limits?

The contribution limit for a Coverdell Education Savings Account is $2,000 per year, per child (i.e. beneficiary).

According to the IRS, there may be a reduced limit depending on your MAGI. If your MAGI is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced. If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you can’t contribute to anyone’s Coverdell ESA.

A common question is, “Can I set up a CESA for my child or grandchild and then have an aunt or uncle set up a CESA, or other relative and have each person contribute 2,000?”

Regardless of the number of CESAs opened for the beneficiary the maximum contribution per year, per beneficiary is $2,000, until the child (beneficiary) reaches the age of 18, even if you have more than one contributor. There are some exceptions to those rules for special needs children.


Are there income limits associated with Coverdell Education Savings Accounts?

Yes – There are what’s referred to as Modified Adjusted Gross Income (MAGI) limits.

If you’re single in 2019, and you make between $95,000 and $110,000 MAGI, you can only make a partial contribution to a CESA account. This is what’s referred to as the phase-out range. As you get closer to that $110,000, you can only put a small fraction of the full $2,000 allowable limit on an annual basis.

Once you’re over $110,000, unfortunately you cannot contribute to a child or grandchild, or other family member’s Coverdell ESA.

If you’re married and filing jointly, and your MAGI is between $190,000 and $220,000 the contribution limits decrease and as you reach $220,000, you cannot contribute to a CESA.

Visit the IRS WEBSITE for worksheets to help you determine MAGI and contribution limits.


What’s the difference between a 529 plan and a Coverdell Education Savings account?

Typically, with a 529 you get a tax deduction for making the contributions to the plan however you’re restricted on the types of investments you can make with the funds.

Whereas with a Coverdell ESA, you can invest in just about anything as long as your following the rules and regulations associated with other self-directed accounts

Can I have both a 529 and a Coverdell Education Savings Account?

Yes –You can have both a 529 and a CESA.


How do you open a Coverdell Education Savings Account?

To open a Self-Directed CESA at Equity Trust, you can speak with a Senior Account Executive to walk you through the paperwork to establish and fund the account, or you can start the application online.

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